Economics 200 Chapter 3 Notes
Economics 200 Chapter 3 Notes
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Economics 200 1 Economics Chapter 3 Notes 31 Related VS Absolute Prices Inflation an increase in the general price level Deflation a decrease in the average price of goods Consumer Price Index CPI an index of the variation in prices paid by typical consumers for retail goods and services Absolute Prices an amount that is asked or paid for a good or service expressed in currency terms Note Application of the law of demand requires a change in one price relative to another Relative Prices Example Good x s price increased 4 but CPI increased 10 good X actually decreased in price A ECUrrcnf Pnee MO Ir quotK C C last j 39quot5 Fm Adjust price for current times 6 This is Hue oumounI jreaufe m 0ul ll I lg p Q p l rCreaS lt0kC39I39ual price in 7059 F539ws Cf From game 36 Note The law of demand is a statement about consumer s responses to changes in relative real prices not money prices which may reflect irrelevant changes in all prices due to inflation When the fllnli ulwr PG T p n lHlll cl lll P G goods available the inevitable consequence alternatively the way we normally think about it 397Y nfation occurs because of increases in the amount of money in circulation relative to the goods available Economics 200 2 Velocity of money the number of times a given dollar turns over is used 32 Elasticity of Demand Because the dependent variable quantity is measured on the x axis versus the y axis the Sensitivity to the units of measurement can be eliminated by measuring the hi i iimjl 7ll39ll39lilTii if lEl ifquot39 Jlii miriJliiJl lE l l Ell llT gal gllwiii1ri because a percent Change is independent of the units of measurement Used to better communicate the degree of response Most common measure of demand response is the elasticity of demand e Chanje in QuawI I39n39Z AQQ X change In PrC A F lfthe absolute percent change in quantity is greater than the absolute percent change in price the demand is ELASTIC 3 lfthe absolute percent change in quantity is smaller than the absolute percent change in price the demand is INELASTIC Simplified formula of elasticity 6 l 39AQ More y 1e3ccHo Hot 9OKSHC Q AF Less lejaxHte more M039S HC There is a very important relationship between the elasticity of demand and consumer s total expenditure on a good Starting near the reservation price total expenditure TE is very small since so few units almost 0 are purchased As the price is lowered the quantity demanded increases and total expenditure represented by the rectangle bounded by price and quantity increases Note With a linear demand curve as the price is lowered further the point of maximum total expenditure biggest rectangle occurs at the midpoint y exfem1 Iure D Q Economics 200 3 in llll ml 5lillg ell ell it ill la ll p y 4 llll T ll 3l llllll Y llllll 7 lir In the lower part of the rl ln ollullt lwit ll f L9 itlwlnl rillT linellllelm w llll lgpl lilllllUlQ l l W lrx J C Note A demand curve that is elastic is indicative of a good or service for which individuals can relatively easily find alternative goods to consume as its price rises Price Takers an investor whose buying or selling transactions are assumed to have no effect on the market The demand for goods for which few substitutes are available is likely inelastic if ll Goods with inelastic demands TE T as Price T Consumers may worry about monopolies because if the monopoly reduces their output the price of the product will rise because there are no substitutes Profits Rq Cq R is total revenue C is total costs of production Note The quantity at which profits are maximized is where revenue starts to decrease faster than cost or the point where the change in Total Revenue the change in total cost 33 The Second Law of Demand clmfIl lillllnei pD i V i i i if T i p p i T greater if the price change is expected to be ong ived Example Gas 0 If price is increasing temporarily gt people will walk more drive less drive a little slower to save gas 0 lfthe price increase is ong term gt people will carpool buy more fuel efficient cars etc Economics 200 a With a lower relative price the law of demand predicts that proportionally more good apples will be consumed Taxes can have a similar effect ex a sin tax which would raise the price of various qualities of alcohol the same amount leading to a greater relative consumption of higher grades of products The reasoning extends to the case where the fixed cost ex the transportation cost is not in fact a cost but a subsidy v A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction The subsidy is usually given to remove some type of burden and is often considered to be in the interest of the public Example Dinner Price without subsidy Price with 10 subsidy In this example quotlEa 39J quot r39x 1 7m U P 0 quotFu JL l High Quality Dinner 30 20 Low Quality Dinner 15 5 Ratios 21 41 1 r CU U V c U 57 E g u l39 U11 3 3 v 0 v r At the price wo subsidy you must forgo 2 bad meals to have 1 good meals WITH the subsidy you must forgo 4 bad meals to have 1 good meal 4 7 J39Ll 3 1 H39R 1 Pu 0 P V7 o Economics can be used for objective analysis of how sexual and reproductive behavior change when the costs and benefits of sexual activity change a Cost to women of being a virgin at marriage usually regarded as valuable increased a Morality is often sty and with this increase in the price of morality being a virgin at marriage this particular form of morality became less widely pursued and sexual activity outside of marriage increased a In addition invention of birth control and other contraceptives reduced planning required for nonreproductive sex This was another important reduction in the cost or price of sex quantity demanded increased a However abandonment of condoms resulted in higher transmission of ST s increasing the cost of casual sex resulting in a decrease of promiscuous sex Economics 200 6 2 Fertility The takeaway the human desire for sex doesn39t change just our willingness to act on that desire is inversely proportional to its cost Reproduction is much more costly activity for women gestation nurturing baby after birth etc meaning historically men have been more promiscuous Birth rates are much lower than their historical levels Two reasons why cost of having children in urban areas is higher than in rural areas 0 In urban areas space is more expensive ie NYC apartment vs a farm 0 In rural areas children are assets Example on farms even young children are capable of producing income for their parents in the form of chores around the farm Compared to even teenagers in urban areas cannot produce as much Law of demand predicts higher birth rates in rural than urban areas Because parents can choose where to live those with special fondness for children can reduce the cost of having children by moving to locations where the cost of raising children is relatively cheap 3 Religion Opportunity cost of participating in religion included such things as participation in the labor market The higher your wage the higher the price of not working Men historically had higher wages than women meaning the greater participation in religious activities by women was a simple consequence of the law of demand Similarly for the elderly treating salvation as one of the motives for participating in religion the cost of nonparticipation therefore rises with age 4 Suicide It costs persons with higher incomes more to terminate their lives than those with low income Suicide rates fall as income rises The younger a person is the more life they have left to enjoy and thus the more they have to lose by suicide Suicide rates rise during spells of unemployment Takeaway Suicides decrease as its alternative cost to a person increases 5 Smoking Lots of medical research has taken place that shows the adverse effects of smoking In addition advances in medicine have substantially increased the chances of living into old age There is now a greater payoff for adopting ife extending behavior than there was in previous generations Economics 200 0 Not smoking can increase the likelihood of having substantially more life We say the cost of smoking has increased because we now know it to be injurious to one s health and because of medical advances we stand to lose a greater number of years of life than in previous generations by smoking
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